managing dairy farm finances 09 - iowa state university€¦ · 8/6/2009 3 visit the isu extension...
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8/6/2009
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“Managing Dairy Farm Finances”
in the
2009 Dairy Financial Situation
Larry Tranel, Dairy Field Specialist
NE/SE Iowa
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Let’s acknowledge up front:
1) Times are Tough—Negative Profits is Norm
2) You are not alone—Industry and Economy
3) Milk Prices are Low—Feed Costs are High
4) Survival Strategies (Cash Flow) more
important than Long Term (Profitability)?
5) Lenders are Worried….Need to Know how
they think….
So…what can we do about it?
8/6/2009
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Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Managing Dairy Farm Finances
1. Acknowledge Weaknesses:::Focus on Strengths
2. Turn Data into Information and Information
into Knowledge to make INFORMED decisions.
3. Adjust CASH (tax) Records with ACCRUAL
Inventory (Balance Sheet) to accurately analyze
your farm business. NFIFO (next slide)
4. Know Your Cost of Production and your relative
Per Person, Per Acre and Per Cow Efficiencies.
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Net Farm Income from Operations (NFIFO)
= Cash Farm Income
- Cash Farm Expenses
= Net Cash Farm Income (+300/cow)
+ Prepaid Expense Adjustment (End-Beg)
- Accounts Payable Adjustment
+ Feed Inventory Adjustment
+ Livestock Inventory Adjustment
- Depreciation
= NFIFO Goal: Opportunity Cost
of Labor and Capital
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Managing Dairy Farm Finances
1. Profitability: cover costs—accumulate wealth
2. Reduce Risk: avoid losses—reduction in wealth
3. Liquidity: + cash flow in financial obligations
4. Psychological Income: quality of life objectives
Profit = (Price – Cost) x Volume
$5,000 = ($13.50-13.00) x 10,000 cwts.
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1. Net Worth Statement – Snapshot B4 & After;
***Distance b/w You and Insolvency (still picture)
2. Net Farm Income Statement—How did you get
from Beg to Year-End in the farm business? (farm video)
3. Cash Flow Statement—all sources and uses of
cash both farm and non-farm. (farm and home video)
4. Lenders put more stock in cash flowability than your profitability)
Equity is good but “Cash is King” in times like these
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Farm ASSETS (what you own) Farm LIABILITIES (debt you owe) **JAN 1, 2009
Current Current
Cash, Savings $7,500 Taxes Due $2,350
Feed on hand $35,000 Accts Payable $22,000
Acct. Receivables $6,000 Principal Due $12,500
Total Current $48,500 $36,850 $11,650 WC
1.32 CR
Non-Current Non-Current
Cows /Heifers $167,000 Dairy Bank $142,000
Machinery/Eq. $103,000 Creamy Creditor $119,000
Buildings/Land $330,000 Land Contract $69,000
Total Non-Current $600,000 $330,000
Total Assets $648,500 Total Liabilities $366,850 57% D/Asset
Assets – Liabilities = Net Worth
$648,500 - $366,850 = $281,650
.
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…When Cash is King (tight)….
….Liquidity measures the ability of the business to
meet financial obligations as they come due…
Current Ratio = Total Current Farm Assets $84,000
Total Current Farm Liabilities $28,000
Goal: 1.5 to 2 = 3.00
Working Capital=Current Assets–Current Liabilities
Goal: Family Living and Term Debt Principal
$84,000 - $28,000 = $56,000
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Managing Dairy Farm Finances
Solvency measures the amount of borrowed
capital relative to owner’s equity. Principal
payments are a necessary investment, not an
expense into the farm business.
The banker needs their money back (with
interest) so solvency is as important as liquidity
in long run. Can principal be delayed?
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Solvency Measures $500,000 Assets; $275,000 Debt
1. Debt/Asset Ratio = Total Farm Liabilities 55%
Goal: < 40% Total Farm Assets
2. Equity/Asset Ratio = Total Farm Equity 45%
Goal: > 60% Total Farm Assets
3. Debt/Equity Ratio = Total Farm Liabilities 85%
Goal: < 67% Total Farm Equity
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Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Managing Dairy Farm Finances
Financial Efficiency
…measures the intensity a business uses its assets
to generate gross revenue and effectiveness of
production, pricing, financing and marketing….
…how well does the business do business….
is the business leaving money on the table?
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Profitability and Profit = (Price – Cost) x Volume
Financial Efficiency:
1. Operating Profit Margin: NFIFO + Int. Pd – Unpaid Labor
Gross Revenue
Goal > 25%
2. Asset Turnover Ratio: Gross Revenue
Ave. Total Farm Assets
Goal: > 33%
Gross enough to pay for all assets in 3 years
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Profitability and
Financial Efficiency:
3. Return on Assets = NFIFO + Interest Pd – Unpaid Labor
Average Total Farm Assets
Goal: > Interest % you are paying bank
4. Return on Equity = NFIFO – Unpaid Labor Goal: > Opp
Average Total Farm Equity
Operating Profit Margin * Asset Turnover Ratio
= Rate of Return on Assets
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
What should a dairy producer know?
1. Differences between Profit and Cash Flow
2. Production efficiencies (per cow, per labor FTE
and per acre) and financial benchmarks.
3. Know how to keep the records needed to
calculate the measures.
4. Interpret the measures to make informed
decisions! Business and Cash Flow Plans for creditors
8/6/2009
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Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
CASH FLOW STATEMENT
Beginning Cash Balance $0
Non-farm Income $0
Income Taxes Paid $20,000
Principal Payments $20,000
Family Living Expenses $45,000
Capital Purchases $12,000
Capital Sales (exclude cull cows sales) $0
New Monies (from loans, savings, ect.) $0
Net Farm Cash Income $134,798
Ending Cash Flow 7.92% $37,798 >10%
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DAIRY TRANS Profit Performance Rating Yours Goal Average
Adjusted Gross Return per FTE Labor..…………………………………………………… $219,407 $135,000 $75,000
Return to All Labor per FTE Labor.....……………………………………………………….. $55,644 $40,000 $20,000
Number of Cows per FTE Labor..........……………………………………………………….. 66 64 40
Cwts. of Milk Sold per FTE Labor......………………………………………………………… 10,278 10,000 6,500
Pounds of Milk Sold per Cow.........……………………………………………………………….. 15,668 22,000 18,000
Total Debt per Cow....................…………………………………………………………………………………….. $512 $2,500 $4,000
Productive Crop Acres per Cow.........…………………………………………………………… 1.3 2.5 3.5
Capital Cost per Cow…………………$6,534 Invested/cow..………………………… $395 $500 $850
All Labor Costs per Cow..................…………………………………………………………………….. $553 $500 $800
Fixed Cost per Cow (depreciation, interest, repair, taxes, insurance) .........…………………………. $668 $700 $1,200
Net Farm Income per Crop Acre.........……………………………………………………………. $690 $600 $125
Pounds of Milk Produced per Crop Acre………………………………………………….. 11,952 8,000 5,000
Adjusted Gross Cash Income per Crop Acre…………………………………………. $2,551 $1,000 $600
Machinery FMV per Crop Acre....…………………………………………………. $781 $500 $650
Fuel, Gas and Oil Cost per Crop Acre..…………………………………………………….. $55 $30 $35
Repair Cost per Crop Acre........………………………………………………………………………. $139 $30 $45
Fert/Lime/Chem/Seed Cost per Crop Acre……………………………………………. $59 $65 $85
.
8/6/2009
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The "Sweet 16" of Financial Ratios as determined by the National Farm Financial Standards Task Force
**Net Farm Income From Operations (NFIFO).……………………………………... Net Cash Income - Accts Pay Adj+ Prepaid Expense Adj + Feed Inventory Adj + Livestock Inventory Adj - Depreciation = NFIFO$148,347 $50,000 $20,000
**Rate of Return on Assets………………………………………. 6.8% Paid..*……...DEBT INT 9.21% 12.0% 5.0%
**Rate of Return on Equity………………………………………………………………………………….[1-5 Profit Ratios]……………………………. 9.40% 15.0% 5.0%
**Operating Profit Margin………………………………………………………………………………………..................... …………………………. 19.88% 25.0% 15.0%
**Asset Turnover Ratio………………………………………………………………….. [Efficiency]2.2 years……...……... 46% 45% 30%
**Operating Expense Ratio.......………………………………………………………………………………[4 Efficiency Ratios]……………... 71% 50% 60%
**Depreciation Expense Ratio...............……………………………………………………………. 1% 10% 15%
**Interest Expense Ratio...........…………………………………………………………………………. 1% 10% 15%
**Net Farm Income Ratio.............………………………. 100% ……………………… 27% 35% 25%
**Current Ratio.................………………………………………………………………..[2 Liquidity Ratios]…………………… 117503.00 1.75 1.25
**Working Capital.....................………………………………………………………[Goal=Family Living+Principal;Ave=half]…………………………. $106,751 $65,000 $32,500
**Debt/Asset Ratio..[Solvency]...Begin… 8% .……….End 6% 40% 50%
**Equity/Asset Ratio………………………...Begin… 92% .……….End 94% 60% 50%
**Debt/Equity Ratio…………………………..Begin… 9% .…….…End 7% 67% 80%
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Farm Cash Expenses Yours /Cwt.Eq. /Cow /Cow
Veterinary, Medicine $6,932 $0.24 $42 $80
Dairy Supplies $20,974 $0.74 $128 $100
Breeding Fees $382 $0.01 $2 $45
Feed Purchased Buy generic/commodity feeds; Harvest high quality feeds; Balance rations; Test feeds; Other feed added; Check crop acres per cow.$203,474 $7.13 $1,241 $450
Repairs $29,784 $1.04 $182 $125
Seed, Chem, Fert $12,735 $0.45 $78 $225
Fuel, Gas, and Oil $11,832 $0.41 $72 $90
Utilities Maintain wiring and Equipment; Promply shut lights/motors off;$6,394 $0.22 $39 $60
Interest Paid +AG12 High price paid for cows; overinvestment in capital; Short term, high cost interest; Less than $1.50 per cwt.$5,716 $0.20 $35 $100
Labor Hired $45,751 $1.60 $279 $225
Rent, Lease and Hire $8,750 $0.31 $53 $50
Property Taxes $8,104 $0.28 $49 $75
Farm Insurance $6,787 $0.24 $41 $40
Other Cash Expense Comparison shopping; Hay and corn purchased; High other repairs; Buying unncessary inputs; Other?$12,565 $0.44 $77 $100
Total Cash Expense $380,180 $13.32 $2,318 $1,765
Net Cash Income $134,798 $5.90 $822 $1,520
Inventory Change $13,549 $0.47 $83
* NET FARM INCOME FROM OPERATIONS--GOAL= >Family Living + other consumption.NFI = FL + NW change (earnings = consumption + savings). NFI<FL= -savings.Net Farm Income $148,347 $6.37 $905 $800
- Equity@ 5.0% $54,989 $1.93 $335 $300
= Return to Labor $93,358 $4.45 $569 $500
8/6/2009
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$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Vet
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Rep
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Cro
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Fu
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Util
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Inte
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Lab
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Ren
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Tax
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Insu
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Cash Expenses
Your Values Benchmark Averages
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Milk Income over Feed Costs
Goal w/Rep Goal w/o Rep YOURS is based on a goal of milk
Total Feed and Crop Production Costs $290,056 $240,856 $263,820 being sold at $13.50 per cwt.
164 Total Feed Costs Per Cow $1,843 $1,440 $1,609
Milk Income over Feed Costs Per Cow $1,424 $1,851 $1,404 Numbers are only as good as
Milk Income over Feed Costs Per Cwt. $8.54 $11.39 $8.96 the percentage estimates used.
Total Feed Costs Per Cwt. Milk Sold $8.37 $6.37 $10.27
Price of Corn/bushel $3.40 1.24 Corn Index Milk Price $19.22 The dairy here has $263,820
Price of Dry Hay/ton $145.00 1.45 Hay Index Milk Index 1.42 of feed costs out of $500,160
1.34 Average total costs. Feed is: 52.75%
Notes to Users on the Corn and Hay Price Index: GOAL is: < 50%
The base corn price index is $2.75 per bushel and the base dry hay price index is $100 per dry ton.
The milk price index is based on a milk price of $13.50 per cwt.
8/6/2009
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Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
So, we shared:
1) Profitability Issues
2) Liquidity/Cash Flow Issues
3) Solvency Issues
4) Production & Financial Performance Measures
5) Benchmark Data
6) Lender Concerns
7) What You Need to Know
Now, What Do You Need to Do?
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Here’s my advice:
1) Put together a Jan 1, 2008 and 09 Balance Sheet
2) Do a 2008 Dairy TRANS Analysis using 08 Schedule F to
give you a base year showing how you did in a good year.
3) Project a CASH FLOW for 2009 with 6 months of data
and how 2009 might end up using futures milk prices.
8/6/2009
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Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
Here’s my advice: (cont.)
4) Or do a FINPACK (FINAN) financial projection for 2009.
5) Get together with Extension Dairy Team member for
Dairy TRANS analysis or a FINPACK associate for the FINAN
program. There is no cost at this time.
6) Besides preparing financial records for your banker,
show your production records …show 3-5 years worth of
records that illustrate you are not only good financial
manager, but also a good herd & production managers.
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
A Sample Dairy TRANS Analysis is included:
1) A Beg & End Balance Sheet is needed
2) Schedule F has income and expenses
3) Cash Flow data for the most part is not
necessary for a profitability analysis except for
capital purchases and sales.
4) After done once, many report doing in less than
30 minutes in subsequent years so lots of info
for minimal time input.
8/6/2009
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Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
If you have questions, please give us a call.
1. Services at this point are free/confidential.
2. The financial analysis gives lenders comfort
that you have a handle on your business.
3. Remember that your options get fewer as
problems get worse so get help sooner rather
than later and keep your heads up.
Visit the ISU Extension Dairy Team at: www.extension.iastate.edu/dairyteam
For more information contact the ISU Dairy Team:
NW—Chris Mondak, [email protected]
Ron Hook, [email protected]
NE—Dale Thoreson, [email protected]
Larry Tranel, [email protected]
Campus—Leo Timms, [email protected]
Lee Kilmer, [email protected]